Morningstar: Thesis 08-04-2005
Although Brooks is the market-share leader in semiconductor automation, we think intense competition and buyer concentration make the business fundamentally unattractive. We would not consider the shares unless they traded at a wide discount to our fair value estimate.
Equipment automation, which includes robotic systems sold to chip and chip-equipment manufacturers, is Brooks' largest segment at roughly 50% of sales. The remaining 50% of sales is split evenly between factory automation hardware, which includes automated material-handling systems (AMHS), and factory automation software, which includes logistics software to manage factory workflow.
Despite its broad product portfolio, Brooks faces numerous competitors in each of its segments. In equipment automation, Brooks must compete not only with Asyst ASYT and several Japanese firms, but also with in-house development by existing and potential customers. For example, leading chip-equipment maker Applied Materials AMAT manufactures many of its own automation modules. Furthermore, in the important Asian market, Brooks is at a competitive disadvantage to local rivals, especially in Japan, where firms tend to favor domestic suppliers.
AMHS is a large revenue opportunity because of the increased automation needs in 300-millimeter and flat-panel display fabrication plants, but the economics of the business are brutal. A concentrated base of AMHS buyers will typically negotiate lower prices or seek competing bids. In addition, Japanese competitors Daifuku and Murata have leaner cost structures that allow them to compete aggressively on price. In the factory software segment, Brooks must compete with the service arms of IBM IBM and Hewlett-Packard HPQ.
Brooks' operating results reflect these difficult economics. Even when we exclude a gigantic write-down of goodwill and intangibles in 2002, returns on invested capital still averaged negative 11% over the past five years. In the peak year of fiscal 2000, ROIC reached only 3%. Moreover, operations and capital expenditures have consumed $200 million of cash in the past five years, leading Brooks to tap the capital markets for additional funds in 2001 and 2003.
We think the trend toward increased automation system outsourcing by chip-equipment makers will improve Brooks' results, since equipment automation is the firm's most profitable segment. However, we are not persuaded that Brooks can reliably earn ROICs that exceed its cost of capital and avoid long-term destruction of shareholder wealth.
Valuation
Our fair value estimate for Brooks Automation is $11 per share. Our discounted cash-flow model assumes 6% average sales growth over the next five years, coupled with average operating margins of 5%, including expected amortization charges. Our sales forecast reflects the increased revenue opportunity in 300-millimeter fabrication plants and growing outsourcing of automation systems by chip-equipment makers. Brooks' valuation is limited by poor gross margins, especially in equipment automation and factory hardware. We do not forecast significant improvements in gross margins, given the intense price competition. We reduce our fair value estimate $1 to account for outstanding options and future grants.
Risk
Like those of other equipment firms, Brooks' results are tied to the volatile cycles of the semiconductor industry. Large revenue declines, steep losses, and share dilution are possible as Brooks taps the capital markets for additional funding. Brooks has made 15 acquisitions since the end of 2000, including the recent purchase of Helix Technology HELX for roughly $450 million, and future acquisitions may destroy shareholder value.
See Previous Analyst Reports
Close Competitors TTM Sales $Mil Market Cap $Mil
Brooks Automation 528 661
* Asyst Technologies 591 233
Newport 347 576
TDK ADR 5,799 10,005
* IBM 96,198 131,812
* Hewlett-Packard 83,302 76,574
* Morningstar Analyst Report Available | Compare These Stocks
Data as of 03-31-2005
Strategy
Brooks' strategy is to gain market share and maximize profitability. The firm is taking advantage of increased outsourcing by semiconductor-equipment manufacturers of automation subsystems, as well as the larger revenue opportunity for automation in fabrication plants. It is focusing on improving profitability by redesigning volume products for lower-cost manufacturing, consolidating vendors, and sourcing materials from lower-cost regions.
Management & Stewardship
Robert Therrien recently retired after a long stint as Brooks' CEO, but he will remain on as chairman. Edward Grady, Brooks' president and COO, assumed the CEO title. Robert Woodbury joined the firm in early 2003 as CFO. Management's compensation appears reasonable, but employee option grants are generous. At the end of fiscal 2004, options represented 13% of shares outstanding. Including options, directors and management own only 4.6% of Brooks. Elimination of shareholders' right to call special meetings and a poison-pill plan are not investor-friendly actions.
Profile
Founded in 1978, Brooks Automation supplies hardware and software automation systems for semiconductor and other advanced manufacturing processes. Brooks' hardware products transport and load materials throughout the fabrication plant, while its software systems handle the flow of manufacturing data. Brooks also sells automation subsystems to semiconductor-equipment manufacturers.
Growth
Brooks' growth is tied to the cyclical semiconductor industry. With the upturn in industry capital spending, the firm grew significantly in fiscal 2004. Brooks has ample growth opportunities as more advanced manufacturing processes require increased automation.
Profitability
Brooks returned to profitability in fiscal 2004. However, the recent past has not been encouraging. Brooks was last profitable in 2000, and the firm recorded a loss of $720 million in 2002 because of impairment charges. Restructuring has cut operating expenses significantly, but the firm will not be especially profitable until it improves gross margins.
Financial Health
Brooks is in passable financial health, with $349 million in cash and securities, but operations and capital expenditures consumed $200 million of cash in the past five years. This cash consumption forced Brooks to issue $175 million of convertible debt in 2001 and $124 million of new stock in 2003. |
